In addition to the information about Transition Service Agreements (TSA) in the previous two posts, here are three more important points that you should discuss during the transition process.
The seller should identify major projects that are in process, or scheduled to be performed, for the target business. Considerations may include: (i) complexity; (ii) current status, including remaining work and completion time frame; (iii) current and planned future investments; and (iv) potential costs and other impacts of termination prior to closing.
The seller should determine which personnel support the target business including the employing entity, work locations, locations supported by such personnel, whether such personnel are to be retained by the seller or transferred to the buyer and whether any such personnel are critical or “key” to the operation of any business.
The buyer should evaluate the seller’s responses through due diligence to understand the systems and services used to run the business. The buyer should identify potential overlaps and gaps in its own capabilities and systems. In the event of overlaps, the buyer should identify which overlapping item should be retained after closing. In the event of gaps, the buyer should identify how the inadequate or lacking systems or services will be addressed, such as through the buyer’s current systems and services, TSA services or newly procured systems or services. Incompatibilities with the buyer’s current systems should be identified so alternative arrangements can be made. The buyer should also assess sourcing options for the target business when the TSA ends.
TSA issues are rarely paid attention to early in the process of selling or buying a company. When left to the end, unnecessary delays and costs can result. Proactively addressing these issues up-front can help avoid these problems.
The seller and buyer should start talking about the Transition Service Agreement (TSA) early in the deal process. Ideally, the seller and buyer would involve a wide variety of people in early deal discussions. However, this is often not possible due to the need for confidentiality. The objective should be to involve the right people without impeding sale negotiations.
The seller should identify systems and services that are critical to the business after the buyer takes over. These might include:
• Human resource systems
• Claims/payment processing systems
• Web sites/e-commerce infrastructure
• Production/manufacturing control
• Interfaces for interactions with third parties
• IT facilities and resources
• Service agreements (outsourcing services, landline/mobile telecom and personal digital assistants (PDAs))
• License agreements
FOR EACH ITEM IDENTIFIED, THE SELLER SHOULD ALSO CONSIDER KEY ISSUES:
• What technology platforms are used?
• Was the system or service developed internally by the seller?
• Is the system or service “dedicated” or “shared”?
• Is it feasible to assign to the buyer any third-party agreements used to support the business, and/or whether consents are required to provide services under the TSA to the buyer?
• Are there commingled data or records that will be impractical for the seller to segregate such as email or historical or archived data?
The seller also should determine if any of these items will no longer be required after the deal closes. Doing this analysis early may help the seller get a better handle on IT-related transaction costs for the deal.
When selling a business, one issue that often is overlooked is whether any post-closing services need to be provided under a transition services agreement (TSA). This is particularly true when the sale is of a portion or division of a business rather than the entire enterprise. In the next few blog posts, we’ll look at when TSAs are advisable and how to use them.
IS A TSA NEEDED?
The buyer and seller should determine early on whether they need a TSA. Not every deal requires a TSA. However, if either party will need assets or assistance from the other party after closing, a TSA is advisable.
TSA LENGTH: HOW LONG?
A TSA of 3-6 months might be sufficient to deal with system migration and training issues. But in a complex situation, for example, if the buyer will need to rely on systems controlled by the seller, a multi-year TSA may be required.
TSAs: BEGIN EARLY
TSA issues should be contemplated while the structure of the transaction is still in flux and before the buyer has been identified. For this reason, the seller’s initial preparation is likely to be refined as the deal progresses. Nevertheless, there can be significant value in careful planning early in the deal process, in part because this enables the seller to present a workable deal package to the buyer, including information that the buyer will need to quickly assess any overlaps or gaps in assets and capabilities for running the target business.
(Guest post from Eric Williams, business broker and consultant with Codiligent, LLC)
Both TSAs and outsourcing agreements often involve one party providing the other with services. However, in TSAs, the seller (as the service provider) is generally not in the business of providing those services. Therefore, a seller may only be willing to commit to provide the TSA services in the same manner that it provides similar services to itself.
Does your business struggle with unmotivated employees and high turnover? Are you concerned that if you were to try selling your business a buyer would object to your personnel issues?
Maybe you’ve even asked business brokers, CPAs, or consultants what you should do and you’ve been told that you need to provide higher salaries, bonuses, or other additional compensation.
Yet, if you do so, that may reduce profitability which will negatively impact business value.
Running a business can be difficult when employees aren’t motivated, and finding a solution that doesn’t compromise business value is important.
SHOULD YOU PAY EMPLOYEES MORE?
New research shows that if you listened to a business broker, CPA, or consultant who suggested paying employees more, you may have received bad advice.
While it is true that if people have too low of compensation they may be unmotivated, the research indicates that giving high pay or bonuses for better performance may not work.
Instead, what tends to motivate employees – at least for challenging, skilled work are: autonomy, mastery, and purpose.
Why AUTONOMY, MASTERY, AND PURPOSE are motivating factors
Autonomy is the desire to be self-directed. Providing a sense of autonomy can increase employee engagement.
Mastery is the urge to get better at something, and provides satisfaction.
Purpose – if separated from profit – gives meaning.
Take a look at this animated video discussing these issues by RSA Animate, Drive: The surprising truth about what motivates us.
How to Motivate Your Employees & maximize profit
Think about how you run your own company and what you do to incentivize performance. Do your employees feel a sense of autonomy, mastery, and purpose?
If you could benefit from more advice about maximizing profit, contact James M. Hillas, P.C. to make sure you’re running your business efficiently.
As we discussed earlier, sellers should be prepared to deal with either a financial buyer, who views the acquisition purely for its potential return on investment, or a strategic buyer, who views the acquisition as having potential to enhance an existing business.
MARKETING TO A STRATEGIC BUYER
If the seller has the opportunity, he or she is often better served by marketing to a strategic buyer. A strategic buyer may view the business as an opportunity to eliminate a competitor, expand market share, or roll out a new product or service line. If your business is an important piece in the buyer’s strategy, the buyer will recognize that value and pay a premium. In addition, strategic acquisitions often have intrinsic value such as increased sales, cost savings, and financial efficiencies.
MAXIMIZING THE SALE PRICE
Anticipating and selling the potential synergies for a strategic buyer should be part of the seller’s due diligence process when entering into negotiations. Naturally, sellers want to maximize the sale price by factoring potential synergies into the valuation process, while buyers would prefer to price the business as a stand-alone acquisition. Accordingly, the seller should consider the value of the company from both perspectives. As the saying goes, knowledge is power. Engaging in proactive thinking to identify potential value to a strategic buyer will empower the seller in negotiations with the buyer and will likely improve the seller’s bottom line when determining the final sale price.